BroBrexit: brief thoughts on sustainable pricing in the UK

On the train home today,Richard Hemming MW‘s tweet drew my attention to Drinks Retailing News‘ story that Aussie family wine business,Brown Brothersis exiting the UK. That, in the same week that major integrated distributor-retailer, Conviviality plc imploded into administration (and perhaps demonstrating that there’s a lot more to M&A than doing deals…like post-merger integration, establishment of financial and management control…?), makes for a gloomy run into Easter. And it sparked me to get some unstructured thoughts down on the subject.

I’m sad that the family have decided that the Brown Brothers brand should exit the UK. I was drinking some Orange Muscat and Flora just a couple of weeks ago. A solid mid-to-premium wine producer.

But I wasn’t motivated to write this (first ever) blog post to mourn their loss. Nor to debate the myriad of factors behind their departure. Nor am I even going to take it as a moment to rant about the lunacy of Brexit, which they did cite.

What took me was the idea of “unsustainability”. In simple terms, I read that as “prices are not high enough to make the UK a sufficiently profitable market for it to be sustainable for Brown Brothers to participate in”.

If we look at this graph, with data taken directly from Her Majesty’s Revenue and Customs 2013 dataset of UK retail wine bottle pricing, wine prices have risen:

HMRC retail wine bottle prices broken down by tax

But that growth has been entirely as a result of VAT rises and, above all, the Duty escalator that has taken flat-rate Duty to over £2 per bottle. Literally no change in the amount of money going into the wine itself in 20 years. Just £1.47 to cover the wine, its shipping from as far afield as Australia, bottling, marketing and retailing.

Despite all the efforts of the various parts of the wine trade in product development, marketing, trade training, retailing and so on, it has simply maintained the status quo.

Since 2012, prices have risen further, with WSTA figures quoting £5.56 in the middle of 2017. But again, due to tax rises and Brexit-related foreign exchange swings according to the WSTA. Which, if we take these figures at face value, leaves precious little for the average wine brand to play with, on average.

I can understand why Brown Brothers are BroBrexiting.

The question is what to do about it? Does the industry watch the events of this week and stand around wringing its hands, saying “Yes, it’s terrible isn’t it?“, then carry on doing the same things that have always been done?

Competitive intensity is certainly a driver of price suppression. But that’s the supply-side. What of demand? Wine is not a commodity; it is not milk, where there is essentially one product with a market price that’s set by supply competition, it is a myriad of products at different price levels. Prevailing market ‘pricing’ is therefore a weighted average of demand across price points. Meaning consumers can relieve price pressure (or grow the underlying average bottle price) by trading-up – buying ‘better’.

How to achieve that, and achieve sustainable pricing? Teach them. As can be read in my 2017MW Research Paper (and in the summary of it, published by the WSETfor Diploma Alumni), consumers will spend +12% on average if they have done a wine course of at least 8 hours – a 1 day course equivalent. That goes up the longer they learn for. And that’s an increase for the most interested wine consumers, already spending more, so the impact on the market average would be even greater. Plus there are 6-7 million UK wine drinkers who are interested in doing a course, which is enough to move the dial.

Getting courses to them takes commitment from the trade. That, in my view, should include brand owners – although it would be easier for larger brands or brands backed by businesses with deeper pockets to grasp this particular nettle at the scale required to make a difference. Nevertheless, why couldn’t a Brown Brothers, or better still aTreasury-backed, quality-orientated Penfolds, with a quality hierarchy within the brand, drive consumer education?

How? Well, that can be as simply as partnering with educators like Local Wine School and others to offer discounts on courses. That’d not only get drinkers to value the higher levels of the brand’s portfolio, but also increase their affinity for the brand that has brought them the course.

I’m sure there will be readers who will cry that this is impractical or would never “pay back”. And I do appreciate that it is hard for individual producers (and retailers, importers, etc.) to take a stand on their own.

But the question I come back with is this: if not consumer education, which demonstrably works, then what? If not now, when? If not your brand, who?

The one thing that the HMRC data demonstrates is that wringing our hands and then sitting on them will do is keep an unsustainable, flat-lining pricing environment. Surely it’s time for a change?